U.S. Securities Law Briefing
With two Commissioners dissenting, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) recently voted to propose amendments to its whistleblower program. The most controversial proposed change would provide the SEC with the discretion to adjust small awards upward and “exceedingly large” awards downward.
As mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), the SEC established in 2011 a program that would pay awards to whistleblowers who voluntarily provide the Commission with original information leading to the successful enforcement by the SEC of a federal court or administrative action in which monetary sanctions totaling more than US$1m are obtained. The whistleblower – defined as a person who provides information to the SEC relating to a possible violation of the federal securities laws that has occurred, is ongoing or is about to occur – would be eligible for a minimum award of 10% and up to 30% of any monetary sanctions obtained by the SEC. Since 2011, the SEC has ordered over US$266m in whistleblower awards to 55 individuals.
These are the key changes that the SEC has proposed:
Additional considerations for small and exceedingly large awards: Currently, the SEC’s rules governing the whistleblower program provide four criteria that may increase an award percentage and three criteria that may decrease an award percentage. The rules do not expressly permit the SEC to consider whether a relatively small or exceedingly large potential payout is appropriate to advance the program’s goals of rewarding whistleblowers and incentivizing future whistleblowers.
With respect to potential awards that could yield a payout of US$2m or less, the proposed rules would authorize the SEC to adjust the award percentage upward under certain circumstances (subject to the 30% statutory maximum) to an amount that the SEC determines more appropriately achieves the program’s objectives of rewarding meritorious whistleblowers and sufficiently incentivizing future whistleblowers who might otherwise be concerned about the low dollar amount of a potential award.
With respect to potential awards that could yield total collected monetary sanctions of at least US$100m, the proposed rules would authorize the SEC to adjust the award percentage so that it would yield a payout (subject to the 10% statutory minimum) that does not exceed an amount that is reasonably necessary to reward the whistleblower and to incentivize other similarly situated whistleblowers. In no event, however, would the award be adjusted below US$30m.
Allowing awards based on deferred prosecution agreements (“DPAs”), non-prosecution agreements (“NPAs”) or SEC settlement agreements: Currently, the whistleblower program authorizes the SEC to pay whistleblower awards in relation to the “successful enforcement” of “covered judicial or administrative actions” brought by the SEC and certain “related actions” of other authorities, most notably the U.S. Department of Justice (“DOJ”). The proposed amendments provide that, for the purposes of making an award, a DPA or NPA entered into by the DOJ or a state attorney general in a criminal case, or a settlement agreement entered into by the SEC outside of the context of a judicial or administrative proceeding to address violations of the securities laws, would be deemed an “administrative action” and any money required to be paid thereunder would be deemed a “monetary sanction.”
Uniform definition of whistleblower: The whistleblower program has two main components: the award program and the anti-retaliation protections. While qualification for the award program is contingent upon providing information to the SEC, a 2015 SEC interpretive release said that reporting to the SEC was not required in order for the anti-retaliation protections to apply. In Digital Realty Trust, Inc. v. Somers, 138 S. Ct. 767 (2018), the U.S. Supreme Court held that the Dodd-Frank Act unambiguously requires that an individual report a possible securities law violation to the SEC in order to qualify for employment retaliation protection. In order to comport with the ruling, the proposed amendments would, among other things, promulgate a uniform definition of “whistleblower” that would apply to all aspects of the whistleblower rules. The term whistleblower would be defined as “any individual who provides, or two or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.”
Elimination of potential double recovery: The proposed amendments would clarify that a law-enforcement action would not qualify as a related action if the SEC determines that there is a separate whistleblower award scheme that more appropriately applies to the enforcement action.
Changes to make the award review process more efficient: The proposed rules would clarify the SEC’s ability to bar individuals from submitting whistleblower award applications where they are found to have submitted false information to the SEC. The Commission would be given the authority to permanently bar an individual from seeking an award after a determination that the individual has abused the process by submitting three frivolous award applications. The Commission would also be provided with a summary disposition procedure for certain types of likely denials, such as untimely award applications.
Comments are due 60 days after the proposal’s publication in the Federal Register.